State v. Weil

• Decision Date: 21 May 1936
• Docket Number: 3 Div. 174
• Parties: STATE v. WEIL.
• Court: Alabama Supreme Court

168 So. 679

232 Ala. 578

STATE v. WEIL.

3 Div. 174

Supreme Court of Alabama

May 21, 1936

Rehearing Denied June 18, 1936

Appeal from Circuit Court, Montgomery County; Walter B. Jones Judge.

Appeal to circuit court by Adolph Weil from assessment by the State Tax Commission for income tax. From a decree for defendant the State appeals.

Reversed and remanded.

Loss on sale of capital assets purchased before 1933 when income tax statute was enacted, should be determined for income tax purposes by deducting sale price from value of assets on beginning of tax year. Gen.Acts 1933, Ex.Sess., p. 158, § 9.

The question involved is the amount of income tax, if any, the taxpayer is due to pay on income received by him during the year 1933. The taxpayer is a member of a partnership, all the members of which are citizens of Alabama. The partnership Weil Brothers, is engaged in buying and selling cotton. Its principal office is located in Montgomery, Ala., with branch offices in New York City, Memphis, Tenn., Dallas, Tex., Savannah, Ga., and Bremen, Germany. The partners share equally in the profits and losses of the business of the partnership. The Alabama office is operated by the partners themselves; the offices without the state are in charge of managers and assistant managers, who operate the business under the direction of the partners. These managers and assistant managers are employed on a profit-sharing basis, and the amount paid them is deducted as an operating expense of the particular office before the profits of that office are declared and apportioned to the partners. When the books of each office are closed at the end of its fiscal year and the profits ascertained, the shares of the managers and assistant managers are segregated and set apart to them, the balance of the profits remaining in that office, subject to the orders of the partners. The books of the partnership show the balance due to the partners in the aggregate, and each office is charged with interest on this balance at the end of its fiscal year. A record of the balance belonging to each partner is kept by the partners themselves in Montgomery, Ala. Each partner has the right at any time to draw out any or all of the balance to his credit.

During the calendar year 1933, the taxpayer received items of income from the offices of the partnership through which its activities were carried on in the several cities above named. An income in excess of $17,000 was received by the taxpayer from the Memphis office of the partnership, of which sum a little more than $500 represented income from business done by the Memphis office in the state of Alabama, the remainder representing income from business done by that office without the state of Alabama. The state tax commission held all the income received by the taxpayer in Alabama was taxable. The taxpayer claimed that only the income derived from sources within the state of Alabama was taxable. The trial court sustained the contention of the taxpayer that income received from the businesses outside the state (except that derived by the Memphis office from business done in Alabama) were not derived from a source within the state and were not taxable.

It further appears that a stated sum was paid to the taxpayer in Alabama as dividend on stock owned by the taxpayer in corporations organized and existing under the laws of states other than Alabama. The tax commission held this income received by the taxpayer in Alabama was taxable. The trial court sustained the tax commission as to this item, holding such income taxable.

It further appears that interest in a stated amount was paid to the taxpayer in Alabama upon bonds of corporations organized under the laws of states other than Alabama, and not doing business in the state of Alabama, and upon bonds of foreign governments and corporations. The tax commission held this item of income received by the taxpayer in Alabama was taxable. The trial court sustained the tax commission as to this item, holding such income taxable.

It further appears that during said year 1933 the taxpayer sold capital assets, consisting of stocks and bonds, for $21,174.80, which was the fair market value of said stocks and bonds at the time they were sold. These stocks and bonds were purchased by the taxpayer for $64,523.67, at various times in various years prior to 1933; the price paid being the fair market value at the time of purchase. The fair market value of these stocks and bonds on January 1, 1933, was $29,915.99. The taxpayer claimed a loss of $43,348.87, the difference between the purchase price and the sale price. The tax commission allowed a loss of $8,741.19, the difference between the fair market price of said stocks and bonds as of January 1, 1933, and their sale price. The trial court overruled the tax commission as to this item, and held the taxpayer entitled to claim a loss of $43,348.87.

From the decree the state appealed, and the taxpayer cross-assigned errors.

A.A. Carmichael, Atty. Gen., Frontis H. Moore, Asst. Atty. Gen., and Frank E. Spain and Horace C. Wilkinson, both of Birmingham, for the State.

Weil, Stakely & Cater and Hill, Hill, Whiting & Rives, all of Montgomery, for appellee.

Rushton, Crenshaw & Rushton, of Montgomery, amici curiae.

BROWN Justice.

The power to levy taxes is not a delegated power, but is an attribute of sovereignty inherent in the state, and is plenary over persons, franchises, privileges, and property within its jurisdiction, except as restricted by the limitations imposed by the State Constitution and the Constitution of the United States. Phelps v. Union Bank & Trust Co., 225 Ala. 238, 142 So. 552; Union Bank & Trust Co. v. Phelps, 288 U.S. 181, 53 S.Ct. 321, 77 L.Ed. 687; Capital City Water Co. v. Board of Revenue of Montgomery County, 117 Ala. 303, 23 So. 970; 26 R.C.L., p. 86, § 63; Id., p. 26, § 12.

When the people of Alabama, by the Constitution, ordained that certain institutions are essential parts of the government of the state, and vested in the Legislature, created by the Constitution, this attribute of sovereignty, the Constitution became a command to the representatives of the people in Legislature assembled, to levy such taxes as are necessary to maintain the government of the state and its essential institutions, to the end that we may have a government of law, and not a government by men--that justice, domestic tranquillity, and the blessings of liberty may be secured to the people and their posterity in the enjoyment of life, liberty and the pursuit of happiness. Const.1901, § 1.

Taxes are a charge by the state--a forced contribution--for the support of such government, laid upon the persons, property, rights, and privileges of the people by their common consent, implied by the promulgation and adoption of the Constitution. Perry County v. Selma, Marion & Memphis Railroad Company, 58 Ala. 546, 564; 3 Blackstone's Comm., p. 158; 17 C.J., p. 1376, note [a](4).

The authority of the Legislature of this state to levy a tax on net incomes has long been recognized, as appears from the following cases: Board of Revenue of Montgomery County v. Montgomery Gaslight Company, 64 Ala. 269; Western Union Telegraph Co. v. State Board of Assessment, 80 Ala. 273, 60 Am.Rep. 99; Capital City Water Co. v. Board of Revenue of Montgomery County, 117 Ala. 303, 23 So. 970; Eliasberg Bros. Mercantile Co. v. Grimes, 204 Ala. 492, 86 So. 56, 11 A.L.R. 300.

In the Montgomery Gaslight Company's Case, supra, it was observed, the court speaking through Justice Stone: "From this resumé of our statutes, it is manifest that, since February 19, 1867, it has been the policy of our legislature to assess and collect taxes on property owned by the taxpayer on the first day of January, and on his salary, gains and income, received by him during the preceding year. In this way, it may, and does often happen, that taxes apparently double are paid in one year, and rightfully paid, on the same property; once, for the year preceding the assessment, as a gain or profit; and a second time, as being the owner of it on the first day of the year in which it is assessed. If, in the meantime, it has been changed or converted into some other subject of taxation, of which he is the owner on the first of January, it will be subject to assessment in its changed form. This is not double taxation." (Italics supplied.)

The thought underlying these utterances clearly was that the tax on "gains," "profits," or "income" was not a direct, but at most an indirect, tax on the property, the source of such "gains," "profits," or "income."

In Capital City Water Co. v. Board of Revenue of Montgomery County, 117 Ala. 303, 310, 23 So. 970, 972, the constitutionality of a law levying a tax "on gross incomes," which authorized the deduction of the expense of carrying on the business to ascertain the basis of the levy, reducing the basis of the levy to the net income, was the subject of controversy. In disposing of the case, the court, speaking through Justice Haralson, said:

"The point as to the constitutionality of the statute under which a tax on gross income was imposed, was raised in the case of Western Union Telegraph Co. v. State Board of Assessment, supra [80 Ala. 273, 278, 60 Am.Rep. 99], and after careful consideration its constitutionality was sustained; a decision that found complete support in the previous decision of Lott v. Ross, supra [[, and we are asked to overrule that case. The suggestion for overruling it, as may be supposed, and any expectation that it might be done, no doubt grew out of the recent decisions of the federal court known as the 'Income Tax Cases' , 15 S.Ct. 673 . It is sufficient to say, however, without approving or disapproving

...